Why improve your credit score?
Credit providers measure their risk in taking you on as a client before they approve or decline your application for credit, so improving your credit score increases the chances of being granted credit on favorable terms.
How to improve your credit score
- Regularly checking your credit report to confirm all the details are correct.
- Making sure you make payments on any outstanding credit accounts on the due date. (Should you have difficulty in making your payments, you should contact your credit provider to agree on a payment plan, or to reduce your regular payments to an amount that you can afford to pay).
- Consider setting up regular automated payments rather than doing manual payments.
- If you have too many old, unused credit accounts, consider closing them.
- If you are almost reaching your credit limit on one or more accounts, try and reduce your balance. Outstanding balances mean you have a lot of outstanding debt in your name.
How long does it take to improve your credit score?
It depends on how long it will take to improve areas that need attention and maintain them, real improvement will start showing after three months of consistency, as you show progress your credit score will automatically get updated.
If you have had a couple bad experiences with your credit health, it is helpful to know that, credit inquiries stay on your credit report for up to two years, whereas more serious activities that incur namely late payments, lawsuits, bankruptcy and tax liens will stay on your credit record for up to ten years.
How to build up a credit score if you don’t have debt
Unfortunately you won't have a credit score if you don’t have any debt because your credit score is calculated and based on your credit habits. This doesn't mean your financial health is bad, there's just simply not enough data to give you a credit score. This can be bad news if you're looking for a home loan though, so your first steps will be to apply for financial products where you can start building a credit record.
These can include:
- Credit card
- Vehicle finance
- Phone contract
- Clothing accounts
Consequences of a bad credit score
- Not paying your account on time or at all which can result in you not getting further or desired credit when needed.
- Lenders will see you as a high risk meaning that should they decide to take on that risk, they will charge high interest rates compared to someone with a good credit score.
- Depending on what industry you are in - some industries such as banking - check a potential employee’s credit report and score. They consider a bad credit score as someone who is not trustworthy to work in a banking environment.
Consequences of not checking one’s credit score
It is advisable for a consumer to check their credit report every 3 to 6 months. Statistics show that only 3% of the 24 million credit active South Africans have seen and understood their credit report. This comes as a threat of potential identity theft where someone can use a consumer’s ID to clone their profile and open lines of credit. A credit report contains so much personal information including addresses, phone numbers and employment that the leak of such information poses a big risk of fraud to the individual.
How a credit score affects you when applying for a home loan
When it comes to taking out forms of credit like a home loan, your credit score plays a vital role in your eligibility for a home loan, however it's not the only factor to affect your application, your debt-to-income ratio will also play a big role.
What score do you need to qualify for a home loan?
There's no specific score which will qualify you, if you follow the step to build a healthy credit score and maintain a healthy debt-to-income ratio, lenders will see you as eligible for things like home loans. Most lenders prefer to lend to an individual whose debt is less than 36% of their gross income. This, along with healthy credit habits that keep your score in the ranges above 650 will put you in a good position to secure a home loan.
If you are declined for a home loan, what should you do and when do you apply again?
It's important to know that if you apply for any hard forms of credit like a personal loan, credit card or home loan, you will get a hard inquiry against your credit report, too many of these are a red flag to lenders.
If you have had an unsuccessful home loan application, take a step back and start improving your credit health. There's no fixed time frame for this, it will take as long as you take to form healthier credit habits, pay back debt and wait for that very happy green indicator on your credit report.
How can you get your credit score?
- Fincheck aims to help people make better financial decisions. They have spent a lot of time and effort in building a tool to help you do all of the above. You can sign up for the MyFincheck Credit Score Tool and get your FREE score directly.
- For more information about your credit score and assistance in improving it, you can download the Moneyac app available on the Google Play Store alternatively go to the website www.moneyac.club where you can access your credit report and experts that can help with anything related to financial health.
- TransUnion - 086 148 2482
- Experian - 086 110 5665
- Xpert Decision Systems (XDS) - 086 112 7334
- Compuscan - 086 151 4131
“It is never too late to begin working towards an improved credit profile. After all, it could be the difference between you being able to purchase your dream house, finance a vehicle, pay emergency medical expenses or further your studies one day” Craig concludes.